I’m going to respond to each point individually.

First of all, consumption is good. Why? Because your spending is my income. If everyone reduces their consumption, the ability for people to acquire gainful employment will fall.

Keynes put it this way. What’s prudent on an individual level is not prudent on a collective level.

Prosperity is driven by demand. Savings, by definition, is the diversion of monetary resources away from consumption, which drives demand. Therefore, it makes sense to disincentivise the hoarding of liquidity, or ready cash, by creating a corresponding incentive to invest it, rather than allowing it to remain idle.

That’s why a small amount of inflation is a good thing. If your cash will lose 2% of its value, you’ll be incentivised to invest most of it so as to obtain a rate of return that exceeds the loss inflicted by inflation. You benefit, entrepreneurs who need credit to fuel their businesses benefit, governments benefits from more revenue and finally society benefits from the increase in commerce, both by making more goods/services available and by increasing employment and wages.

Incidentally, inflation is measured by increases in prices. The money supply only has an indirect effect on prices. Austrian economics teaches that there is perfect correlation, but remember that it was created at a time when gold was the standard currency. Now, with floating exchange rates and central banks’ ability to expand or contract the money supply, many Austrian assumptions are no longer applicable.

As far as central banks are concerned, the levers they control are actually a lot more effective at decreasing inflation than they are are increasing it.

There are two main levers of policy. One is fiscal policy, which refers to government spending and taxation. The other is monetary policy, which refers to central banks’ powers to control the money supply and enter bond markets to influence exchange rates.

Restricting the money supply is the most powerful tool of monetary policy. It’s best suited to fighting against inflation.

Stimulating the economy, either with tax cuts or spending increases, is the most powerful tool of fiscal policy. It’s best suited to fighting deflation.

Right now, fiscal policy is geared towards a political goal of fighting the rise in government debt. Government debt isn’t really an economic issue. It’s denominated in a currency that the government controls the issue of, so governments with monetary sovereignty can never go bankrupt, unless they borrow in a different currency (eg Argentina).

Meanwhile, monetary policy is trying to fight deflationary forces, something it’s ill-equipped to do. Quantitative Easing (buying government bonds and destroying them), and historically low interest rates, have so far succeeded in maintaining inflation rates above 0%, but at the cost of market distortions you mention.

Governments are being told by central bankers that they have reached the limit of monetary policy, which is really not well suited to fighting deflation. Yet they persist with austerity.

Why? Two reasons.

First, governments are setting an example. They need the private sector to reduce its debt, which is difficult to argue for when you’re doing precisely the opposite with the government balance sheet.

The second reason is purely political. Governments got elected telling people that government spending has to be squeezed. That’s unpopular, and can only be done with a huge propaganda effort making clear absolute necessity. The reason they went for this is partly ideological, but partly also because they feared government debt more than deflation, which after all hasn’t been known since the 1930s.

By the way, thanks for complimenting my writing. It’s not the form of art I feel most passionate about (I’m really a musician), but it is the one I’m probably most talented at. It means a lot to receive praise, especially from someone who’s making a huge effort to connect with what I’m writing. Perhaps it’s the complexity of the ideas, but perhaps also my writing could be improved.

Every time I try to explain myself, I get a little better at it, so I appreciate the chance to improve my skills.